Wall Street uneasy over rising interest rates

New York
— Wall Street's wheels are spinning in place these days - with interest rates increasing slightly and the market apparently shy about making a major breakout. ``There will continue to be small steps forward,'' but probably no ``significant market advance'' for now, says Laszlo Birinyi, director of equity analysis at Salomon Brothers, in New York. For the moment, of course, the financial community's main preoccupation continues to be interest rates, following unease in recent weeks about what has been seen as an economy far stronger than expected and the threat of renewed inflation.

Thus, last week's increase in the prime rate by a number of United States banks, as well as reports that the Federal Reserve Board is tightening credit somewhat, were not unexpected. ``No real surprises there,'' Mr. Birinyi says.

And even if rates continue to edge up a notch or two, as many analysts expect, ``the market will be able to handle it,'' he says. ``Corporate profits'' is one reason. ``They will continue to climb, and should be much better'' in the second quarter than many investors expect.

Initially, of course, the market reacted negatively to the news on the interest rate move, shedding 37.80 points last Wednesday, to close at 1,965.85, its lowest point since Feb. 11. But it rebounded slightly on Thursday, closing up 2.15 points. For the week ended May 13, the Dow Jones industrial average closed down 16.97 points, at 1,990.55.

``Bearish sentiment predominates,'' is a headline in a recent issue of Moody's Bond Survey, with the issue going on to discuss brisk economic growth as creating a ``hazardous environment for bonds.''

For many traders, the concerted action on rates helps to clear the decks for the rest of the summer. ``It may soon be time to start looking at bonds again, perhaps in the second half of the year,'' argues Mitchell J. Held, an analyst with Smith Barney, Harris Upham, New York. The threat of inflation and higher interest rates works against fixed-income instruments, and in particular equities, as investors move into money market or other highly liquid investments.

Mr. Held notes that interest rates are now ``100 basis points [1 percent] higher than several months back.'' He believes that they ``may rise another 25 to 50 basis points.'' But he expects a leveling off, and probably a drop, in long-term rates late this year, as the US gets closer to the presidential election.

The key to determining the course of interest rates, Held says, involves at least three variables: the course of spot industrial commodity prices; vendor performance, the time between the ordering and the delivery of goods; and initial unemployment claims.

Despite all the discussion about capacity bottlenecks, commodity prices have not yet exceeded levels of last October and December, Held points out. He says price increases in both aluminum and copper seem to have ``topped out.'' One cautionary element he notes is that ``declines in commodity prices are not yet evident.''

Vendor performance has been shortened, falling somewhat in April. Any further decreases, Held says, would be a boost for fixed-income markets.

Finally, he says, initial unemployment claims do not yet suggest that the labor force is operating at full employment.

One way of weighing the future performance of the markets, particularly equities, is to look at what the folks who know most - corporate insiders - are doing. Presumably, except under most unusual circumstances, they would not be buying their own stock if they felt that stock was not going to do well over time, or if the market in general looked unpromising. And since most top corporate officials are required by law to disclose purchases of their own stock, it becomes easy to identify buying trends within this influential group.

What corporate insiders are doing now, says Norman G. Fosback, who edits ``The Insiders,'' a Fort Lauderdale, Fla., newsletter, is to buy their own stocks. ``Corporate insiders are currently very heavy buyers of stock,'' Mr. Fosback says. In fact, he notes, current buying levels, while not quite equal to the super-bullish days of early 1987, are at levels consistent with the start of market rallies during the course of the past 14 years. Among issues that are currently favorites of insiders are Harcourt Brace Jovanovich, Continental Illinois, and Diamond Shamrock.

Fosback does not believe investors, particularly smaller, non-institutional investors, should be intimidated by inflation talk. ``I just don't see interest rates rising all that much,'' he says.

Whether smaller, non-institutional investors return to the market irrespective of what happens on the inflation and interest-rate front is quite a different matter. In testimony before a Washington panel last week, Donald Regan, the former White House chief of staff and Treasury chief, pressed his case for an immediate halt to index trading. Stock index trading has been identified as one of the culprits in last October's stock market plunge.

Five Wall Street brokerage houses apparently agree with Mr. Regan, since they suspended index trading for their own accounts. The five firms are Bear Stearns; Kidder, Peabody; Morgan Stanley; PaineWebber; and Salomon Brothers.

But getting the smaller investor back into the market will take more than just curbs on index trading, says James B. Cloonan, president of the American Association of Individual Investors, in Chicago. Mr. Cloonan, who welcomes some curbs on index trading during ``fast markets,'' notes that small investors have been gradually ``disinvesting from the market over the years.''

But Cloonan also notes that among those smaller investors who have stayed in the market, ``there has been no great disinvestment since last October.'' That in itself, he says, suggests some stability about the current market, even though its wheels seem to be spinning.